Global economy in peril: IMF

The global economic outlook is increasingly grim with the United States mired in a recession from a housing meltdown whose effects are still spreading, the IMF said Wednesday.

Global expansion is set to slow to 3.7 per cent in 2008 amid an unfolding crisis that began in the United States, the International Monetary Fund said in its semiannual World Economic Outlook (WEO) report.

The growth estimate is a half point lower than its January WEO update.

The US economy, the world's biggest, is likely in a "mild recession" and will stagnate through much of 2009 as housing prices slide further and credit conditions remain difficult.

For the world economy, there is a 25 per cent chance of dropping below three per cent growth in 2008 and 2009, which according to the IMF would be the equivalent of a global recession.

"Moreover, growth is projected to remain broadly unchanged in 2009," with growth in the advanced economies likely to fall "well below potential."

The United States, the epicenter of the turmoil, is poised to grow a paltry 0.5 per cent in 2008, the IMF said, despite a multibillion-dollar government stimulus package.

US growth for 2009 will improve to 0.6 per cent, a "modest" recovery expected as financial institutions clean up their balance sheets.

The risks to global growth remain "tilted to the downside," the IMF warned in the report, a key plank of its spring meetings with the World Bank in Washington on Saturday and Sunday.

The IMF underscored the potential for "deep losses" on structured credit related to the US subprime mortgage market and other sectors.

Those losses could "cause the current credit squeeze to mutate into a full-blown credit crunch," said the 185-nation institution, whose mission is to promote global financial stability.

A top US official said the IMF was too downbeat in its outlook.

"We remain positive about the long-term resilience of the global economy, as well as the long-term resilience of the US economy, and we believe that the IMF's latest WEO projections are unduly pessimistic," Treasury Under Secretary for International Affairs David McCormick told journalists.

McCormick did not offer any more specific growth numbers but said the US believes the IMF projections are "significantly below consensus."

He also said the administration hopes a faster recovery in 2008 and a "steeper growth curve" in 2009.

In its report, the IMF said that growth in western Europe is projected to slow "well below" potential due to financial strains, trade spillovers and housing downturns in some countries.

Growth in the 15-nation eurozone is set to decelerate to 1.4 per cent in 2008 and 1.2 per cent in 2009, down 0.2 per cent and 0.7 per cent, respectively, from the January update.

Japan, the world's second-largest economy, is poised to slow to pace of 1.4 per cent this year with little improvement at 1.5 per cent in 2009.

By contrast, emerging and developing countries have proven more resilient to the distress because they are underpinned by their increasing integration into the global economy and a commodity price boom, the IMF said.

Their combined growth will decelerate to a still-robust 6.7 per cent expansion in 2008, off 0.2 per centage points from the prior forecast, and slip to 6.6 per cent in 2009.

China and India, the new engines of global growth, will also feel the slowdown, the IMF said.

China will continue to lead growth, expanding at 9.3 per cent in 2008 and 9.5 per cent in 2009, down 0.7 point and 0.5 point, respectively. India is poised for a 7.9 per cent expansion this year, down 0.5 point, and 8.0 per cent in 2009, off 0.2 point.

The US Federal Reserve's recent steep interest-rate cuts and credit easing have been justified amid rising dampeners on economic growth, the IMF said, while the European Central Bank, despite rising inflationary pressures in the eurozone, "can afford some easing of the policy stance."

The IMF recommended that the Japanese central bank keep its already low interest rate, at 0.5 per cent, on hold, saying there would be "some limited scope" for a reduction if growth prospects sharply deteriorated.

The IMF said policymakers should seek to rebuild confidence in the financial system, strengthen the soundness of institutions and ease liquidity stress. (AFP)